The Funding Solutions of Social Security

Since the creation of the Social Security system in 1935, benefits have been paid through a succession of changes in the law to benefit certain non-working Americans. The system provides simple monthly income to workers and their families who have reached at least 62 years of age, become disabled, or passed away. The program currently pays benefits to over 50 million Americans and there have typically been just over three workers per beneficiary supplying funding through their taxes. As the current policy would completely empty money reserves for benefits by 2037, Social Security has become a hot topic for young and mature voters alike. And, since tax money is projected to fund only 76 percent of the social security budget after the reserves run dry, America has a good reason to place reforming Social Security at the top of its to-do list.

Part of the issue stems from declining birth rates in the United States, a trend also seen around the world in European countries and Japan, compared to the higher number of Americans who will be retiring in the near future [1]. After 2030, the ratio of worker to beneficiary is projected to fall to only two-to-one. The current three-to-one ratio requires that each worker be levied about $300 to meet the average $1,000 benefits per month, but later on the new ratio would require at least $500 in contributions to meet the same average [2]. This places a larger burden on future taxpayers, one that was not present for Americans 20 years ago, and Congress will need to make serious changes if they want the Social Security to last.

The 2009 Social Security Board of Trustees Report agrees that Congress needs to either reduce benefits or increase payroll taxes, especially for those at the cap of Social Security-taxable maximum, in the near future to begin handling the issue of dwindling Social Security funding [3]. Other politicians believe that raising the retirement age would benefit the system by increasing the amount of workers paying for beneficiaries’ monthly incomes, since advanced medicine and medical care will enable Americans to work for more years before needing to retire from the workforce. These plans have near equal backing in federal and local government and present very different methods to achieving the same goal: making Social Security affordable for America. The goal of these two writers is to explain the necessity of one plan over the other, so that you can decide which way you would have your elected representatives handle the issue to better benefit you in the future.

CAPLESS PLAN
Earnings above the Social Security-taxable maximum ($118,500 as of 2016) are not subject to the Social Security payroll tax [16]. For instance, those making $237,000 per year pay Social Security taxes on only half of their earnings [17]. Removing the cap on Social Security-taxable earnings is the most reasonable way to preserve the solvency of Social Security. Sen. Bernie Sanders has proposed a plan to increase Social Security’s tax base that he frequently calls “removing the cap” [18].

This plan, henceforth referred to as the Capless Solvency Plan, diverges from Bernie Sanders’s plan, the Social Security Expansion Act, in two key ways. One is that the Capless plan would keep benefits at their current level for future retirees, rather than expanding them. Under the Sanders expansion plan, Social Security would be doling out $168 billion in additional benefits in 2045 alone [19]. The Capless plan would save hundreds of billions over thirty years simply by keeping benefits as they are.

Secondly, the Sanders plan also would apply the full Social Security tax rate only to annual income above $250,000, letting those making between the maximum taxable annual wages and $250,000 pay the tax only on wages and salaries up to the cap [20]. The Capless plan would remove the cap entirely, allowing all wages and salaries to be taxed at the same rate. This would not only ensure fairness, but also provide a greater tax base. The Social Security Expansion Act applies the Social Security tax to income above $250,000 [21]. The Capless plan would remove this provision. This change would preserve the purpose of Social Security, which is to tax wages to provide retirement income rather than taxing all income to serve other purposes [22]. The removal of the above-$250,000 income tax at first appears to sacrifice tax revenue because those making above $250,000 a year but annual wages of less than $250,000 would seem to pay less tax. But this appearance is deceiving; these people would be taxed at the full rate because the cap on taxable wages would be removed under the Capless plan.

Of course, subjecting anyone to higher payroll taxes would be anathema to supply-siders, who might object that the Capless plan would cause an economic slowdown. This objection is myopic, as it forgets the main beneficiaries of the Capless plan: future workers who would be guaranteed the same Social Security benefits that their parents and grandparents received. This guarantee prevents the decrease in consumption that would results from benefit cuts caused by an insolvent Social Security program. Most other solvency plans that cut benefits would have a similar effect. Therefore, any plan to reduce benefits or raise the Social Security payroll tax might have some slowing effect on the economy. If a negative economic effect is inevitable, then it would be best to have it hit those who can afford it most directly.

The Sanders plan would not achieve true solvency, in large part due to the demographic spike of retirees that will increase the ratio of retirees to workers. Still, it delays the trust fund depletion year. Even accounting for the coming increase in the ratio of retirees to workers, no automatic benefit cuts would be made until 2065, and the trust fund would run dry in 2074 [23]. The Capless plan, by increasing the tax base and not expanding benefits, would keep Social Security solvent into the far future. In fact, the tax revenue would be more than enough to sustain Social Security. The surplus might be used to lower the Social Security tax rate itself, helping to soften the impact on higher wage and salary earners and their employers. Also, it would make the plan a net positive for those earning less than the maximum taxable wages; they would be paying a lower tax for the same benefits. In sum, the Capless plan broadens the tax base of the Social Security payroll tax such that all wages and and salaries are subject to the Social Security payroll tax.

The greatest virtue of the Capless plan is that its effects would escape most people’s notice. In 2011, only 5.8% of workers earned above the 2011 cap of $106,800 [24]. The cap is determined by increases in cost of living, so data from 2011 is still relevant today because it shows the percentage of workers earning above the cap [25]. The Capless plan will disadvantage only these workers to keep Social Security solvent for future generations. Benefit-cutting Social Security solvency plans, such as raising the retirement age, would force nearly everyone, including the working class, to foot the bill. Those few whom the Capless plan disadvantages are those who can most afford to be disadvantaged. If the government uses the surplus to lower the Social Security payroll tax rate, the vast majority of Americans would benefit from the Capless plan.

REBUTTAL
Mr. Youn portrays the Capless Plan as a panacea that would permanently relieve Social Security of any future distress. However, the picture that he paints is not as rosy as it might appear, for he was quite selective about the evidence he chose to present. In the article he cited regarding the solvency of the Bernie Sanders plan, the author writes, “Even an immediate and complete removal of the payroll tax cap would not fully eliminate the shortfall — and that’s without any benefit increases” [26]. Though it is true that the Capless Plan would do more than the Sanders plan to delay a funding crisis, the fact of the matter is that Social Security would still not be completely solvent. There would be a future funding crisis down the road. A tax increase may then have to be extended to non-wealthy individuals in order to avoid a budget shortfall.

Mr. Youn is able to avoid the objection that his plan could potentially harm economic growth by asserting that all Social Security reform plans would harm economic growth, and that the Capless plan has the smallest impact of any other reform plan. The economic impact of removing the cap would be harsher than Mr. Youn suggests. He criticized benefit cutting plans because they would harm the economy by decreasing consumption. That is a true criticism. However, the 5.8% of workers who earn above the 2011 cap of $106,800 are those who have the most income at their disposal. To those who are earning above this cap, the average annual benefits received through Social Security is not a lot of money. Removing the cap would cause consumption to decrease among these workers, and because they earn far more than the average American, the amount of money lost through the tax would hit the economy just as hard as a small decrease in benefits across the board. By contrast, raising the retirement age would increase economic growth by keeping workers in the labor force longer. With so many Americans suffering under what economists are calling “secular stagnation,” the United States needs a Social Security plan that would take us out of the malaise, not deeper into it. Raising the retirement age every time there is an increase in life expectancy is the only plan that allows for higher growth while permanently solving the funding crisis.

RAISING RETIREMENT AGE
With Social Security costs spiraling out of control, life is poised to get much harder for the young professional. A large portion of his income that would otherwise be devoted to rent on his first apartment, or paying off his student loan debt, would instead go towards funding the retirements of the elderly. In 2011, the United States spent $725 billion on Social Security [4], a number that is growing with each passing year. While raising taxes is one possible solution to this growing funding crisis, it is not fair for everyone. It would make life far more difficult for young working people, 45% of whom do not expect to see Social Security last until they retire [5]. Implementing a system that would raise the retirement age whenever the average life expectancy increased would provide a permanent solution to the funding problem. The current system is seeing an unprecedented influx in new retirees, and they are living longer than those who preceded them. In 1940, the average remaining life expectancy for those who survived until age 65 was 12.7 for males and 14.7 for females [6]. In 2012, that number was 17.9 for males and 20.5 for females [7]. Furthermore, in 1965 the average worker to retiree ratio was 4.0. In 2013 it was 2.8 [8]. FDR, the architect of the Social Security Act, said “It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy” [9]. With people living longer than ever before, the worker to retiree ratio is set to keep shrinking as more baby boomers enter into retirement each day. The federal government is paying for these new retirees by borrowing money and going further into debt. Social Security has exceeded its initial obligations and it is going beyond what FDR planned. Raising taxes to counteract the looming budget deficit would only be a temporary fix. While it may help cover the cost in the short term, it will only kick the can down the road as baby boomers keep retiring. A far better solution would be the implementation of a system that would raise the retirement age one year every time the average life expectancy after 65 rose by a year. Congress would never again have to worry about solutions that would only be temporary fixes. As people live longer and grow healthier through advances in medicine, it would enable those who could still work to keep working. This would fulfill FDR’s original vision by allowing the needy who could no longer work a chance at retirement while saving the government money by ensuring that there were never too many retirees receiving benefits. An increase in the retirement age would also lead to a long-term increase in economic growth. This growth would come from workers spending more time in the labor force. According to the Congressional Budget Office, increasing the normal age of retirement from 65 to 70 would grow GDP an additional 1.0% by 2035 [10]. It would also save the government $120 billion over the next ten years [11]. These new savings could be used to fund other projects that the government has fallen behind on, such as infrastructure projects.There are many who would object to this solution because they view Social Security as a promise. Workers have paid into the program their entire lives and they deserve to receive the fruit of their labors. However, in order for the government to deliver on this promise, changes have to be made. There is no doubt that raising taxes in order to fund Social Security will help millions of people retire early. However, those tax dollars have to come from somewhere. While one group would be helped, another would be harmed. Raising taxes in order to finance increased Social Security spending will hurt working people, especially young people who are new to the workforce. The intentions of those who want to raise taxes to sustain, or even increase, Social Security benefits are noble, but it is simply not feasible. With young people across the country having to struggle with record levels of student loans [12], a new tax burden is the last thing that they need. Increasing the retirement age with every increase in life expectancy would be beneficial for everyone, and it would still fulfill FDR’s original vision of having a support system for the neediest. Young professionals will have more money to start their lives with, and those who can still work will increase economic productivity by continuing to work, instead of retiring early.James DailREBUTTAL
Admittedly, raising the retirement age is unique among benefit-cutting plans in that it does not result in lower monthly benefits, but rather a shorter time over which to receive them. This lets it avoid the decrease in consumption that would result from other benefit-cutting plans, but this proposal would cause a host of other, larger problems. For instance, since lower-income workers have shorter life expectancies than higher-income workers, raising the retirement age would be regressive [13].

Raising the retirement age would increase workers’ medical costs and strain Medicaid because those with physically demanding jobs would have to work for longer into old age, greatly increasing their risk of injury. Older workers with sedentary jobs would become more susceptible to health problems associated with physical inactivity, such as heart disease. With more older workers becoming injured, health insurance companies would respond by raising rates on older workers, further harming their pocketbooks. This response would prove especially damaging from major insurance companies pulling out of Affordable Care Act state exchanges, such as Aetna [14]. Those in states from which companies like Aetna are withdrawing will face higher premiums and deductibles on top their restricted insurance options.

Furthermore, companies often exhibit bias against older workers in hiring. This “ageism,” as many have called it, makes it more difficult to find a job as an older worker, especially in fast-paced fields such as the tech sector [15]. If workers who will soon turn 65 lose their jobs, they could spend years unemployed or in a low-paying job if the retirement age were raised. Any retirement savings plans these workers might have would suffer, and they would retire poorer.Bruno Youn